What If The Black Monday Crash of 1987 Never Happened?

The Actual History

On October 19, 1987, global stock markets experienced what came to be known as "Black Monday," the largest single-day percentage decline in U.S. stock market history. The Dow Jones Industrial Average (DJIA) plummeted 508 points, losing 22.6% of its value in a single trading session. This catastrophic drop surpassed even the 1929 crash that preceded the Great Depression. The collapse wasn't limited to American markets—stock exchanges worldwide experienced similar precipitous falls. Hong Kong's market dropped 45.5%, Australia's fell 41.8%, and the United Kingdom's declined by 26.4%.

The crash occurred against a backdrop of several concerning economic developments. The U.S. dollar had been weakening throughout 1987, and interest rates were rising. Trade and budget deficits were growing concerns, and there were signs of potential inflation. In the week before Black Monday, several adverse financial news stories and a significant market decline on the preceding Friday had created a nervous atmosphere among investors.

A critical factor in the 1987 crash was the role of computerized program trading and portfolio insurance strategies. These relatively new financial innovations were designed to protect institutional investors by automatically selling futures contracts as the market declined. However, on Black Monday, these automated systems created a devastating feedback loop: as prices dropped, program trading triggered more selling, which pushed prices down further, triggering yet more selling.

The Federal Reserve, under the recently appointed chairman Alan Greenspan (who had taken office just two months earlier in August 1987), responded decisively. On October 20, the Fed issued a statement affirming its readiness to serve as a source of liquidity to support the economic and financial system. The central bank injected billions into the banking system and lowered interest rates. Major banks, encouraged by the Fed, continued lending to securities firms, helping to keep many solvent.

Unlike the 1929 crash, the 1987 crash didn't lead to a prolonged economic downturn. Markets recovered relatively quickly, with the Dow regaining its pre-crash level by early 1989. However, the crash led to significant changes in market structures and regulations. The Securities and Exchange Commission (SEC) implemented circuit breakers designed to halt trading temporarily during extreme market volatility. Margin requirements were tightened, and coordination between market regulators increased.

Black Monday also cemented Alan Greenspan's reputation and shaped his approach as Fed chairman. His swift response became known as the "Greenspan put"—a market perception that the Fed would intervene to prevent financial crises from severely damaging the broader economy. This precedent influenced Fed policy for decades, especially during later financial crises.

The crash revealed vulnerabilities in the global financial system, particularly regarding liquidity, market structure, and the potential dangers of new financial instruments and technologies. These lessons would be partially remembered and partially forgotten in the lead-up to subsequent financial crises, including the 2008 Global Financial Crisis.

The Point of Divergence

What if the Black Monday Crash of 1987 never happened? In this alternate timeline, we explore a scenario where the perfect storm of factors that led to the largest single-day percentage decline in stock market history never coalesced, allowing the bull market of the 1980s to continue on a different trajectory.

Several plausible mechanisms could have prevented the crash:

First, the crash might have been averted through different policy decisions in the preceding months. In our timeline, rising interest rates and international tensions over currency valuations (particularly between the United States and Germany) created preconditions for market instability. If the Federal Reserve under newly appointed Chairman Alan Greenspan had adopted a more accommodative monetary policy stance in September 1987, or if the Treasury Secretary James Baker had not publicly threatened to devalue the dollar against the German Deutsche Mark the weekend before the crash, investor sentiment might have remained more positive.

Alternatively, the technological triggers could have been different. The crash was significantly exacerbated by computerized program trading and portfolio insurance strategies that created a self-reinforcing selling cascade. If financial firms had implemented more sophisticated circuit breakers or risk management protocols within their trading systems, or if the exchanges themselves had halted trading earlier when unusual volatility emerged, the feedback loop might have been interrupted before reaching catastrophic proportions.

A third possibility involves market structure. If the various market segments (stocks, futures, options) had better cross-market coordination mechanisms in place, the liquidity problems and information gaps that amplified the crash might have been mitigated. The crash revealed serious flaws in market structure that were subsequently addressed with regulatory changes; had these protections been implemented preemptively, perhaps through lessons learned from smaller market disruptions, Black Monday might never have occurred.

In this alternate timeline, we'll explore how the financial world might have evolved if the markets had experienced a significant but manageable correction in October 1987 rather than a historic crash—perhaps a series of 4-5% daily declines that would have been concerning but not system-threatening, allowing for a more orderly market adjustment without the psychological and regulatory impacts of Black Monday.

Immediate Aftermath

Continued Market Exuberance

Without the psychological shock of Black Monday, investor confidence in the late 1980s would likely have remained significantly stronger. In our timeline, the crash created a lasting wariness among retail investors and financial professionals. In this alternate reality:

Extended Bull Market: Instead of dropping 22.6% in a single day, markets experience a more modest correction of 15-20% spread over several weeks in late 1987, allowing for a more orderly adjustment. By early 1988, the bull market resumes with the Dow surpassing 2,500 and continuing upward.
Retail Investor Participation: Without the trauma of Black Monday, the trend of growing retail investor participation in equity markets continues unabated through the late 1980s. Discount brokerages see faster growth, and mutual fund inflows remain strong.
M&A Activity: The leveraged buyout (LBO) boom of the 1980s, which was temporarily dampened by Black Monday, continues with greater intensity. The deal that symbolized the end of the LBO era in our timeline—the $25 billion RJR Nabisco takeover—becomes just one of several mega-deals that stretch into 1989-1990.

Different Regulatory Environment

The absence of Black Monday would have profoundly affected the evolution of financial market regulation:

Delayed Implementation of Circuit Breakers: In our timeline, the crash led to the swift implementation of market-wide circuit breakers and price limits. Without this catalyst, these safeguards would likely have been developed more gradually and perhaps less comprehensively, leaving markets potentially more vulnerable to future shocks.
Program Trading Continues Unabated: The crash raised serious concerns about program trading and portfolio insurance strategies. Without this wake-up call, these computerized trading approaches would have continued to proliferate with less scrutiny, potentially creating even larger systemic risks.
Different Focus for the SEC: Rather than concentrating on market structure issues and cross-market coordination as it did after Black Monday, the SEC might have continued its focus on insider trading investigations that dominated its agenda in the mid-1980s.

Altered Federal Reserve Policy Development

Alan Greenspan, who had become Fed Chairman just two months before Black Monday, had his leadership approach profoundly shaped by managing this crisis:

Different Greenspan Legacy: Without the crash as his baptism by fire, Greenspan's approach to monetary policy and financial crises might have developed quite differently. The "Greenspan put"—the market's expectation that the Fed would intervene to stop financial crises—might never have become such a defining feature of Fed policy.
Continued Monetary Tightening: In our timeline, the Fed swiftly pivoted to providing liquidity after the crash. In this alternate timeline, the Fed likely continues its monetary tightening cycle into 1988, potentially leading to a more conventional recession in 1989-1990 rather than the relatively mild downturn that actually occurred.
Different International Coordination: The crash prompted unprecedented coordination between central banks globally. Without this catalyst, the development of international financial coordination mechanisms might have progressed more slowly.

Impact on Wall Street Culture

The absence of Black Monday would have affected Wall Street's cultural evolution:

Delayed Reckoning with Systemic Risk: Black Monday forced financial professionals to confront the potential for systemic market failures. Without this moment of truth, the industry's self-reflection on systemic risks might have been postponed.
Continued Emphasis on Trading Innovation: The crash temporarily slowed the development of complex trading strategies. Without this pause, financial innovation in derivatives and automated trading might have accelerated even faster through the late 1980s and early 1990s.
Different Career Trajectories: Many Wall Street careers were made or broken by Black Monday. In this alternate timeline, different individuals rise to prominence, affecting the leadership of major financial institutions through the 1990s.

The S&L Crisis Context

The late 1980s also witnessed the savings and loan (S&L) crisis, which would unfold differently in this alternate timeline:

Different Crisis Management: Without the experience of managing the market crash, regulators might have approached the S&L crisis differently, potentially with less urgency or different resolution strategies.
Market Absorption Capacity: With stronger equity markets in this alternate timeline, the real estate assets of failed S&Ls might have found buyers more easily, potentially reducing the ultimate cost of the crisis to taxpayers.

Long-term Impact

Evolution of Financial Markets in the 1990s

Without the sobering experience of Black Monday, financial markets would likely have followed a significantly different evolutionary path through the 1990s:

Accelerated Market Computerization

Earlier Electronic Trading Dominance: Without the temporary skepticism of computerized trading that followed Black Monday, electronic trading systems would likely have developed and gained market share more rapidly. The NYSE might have transitioned away from floor trading years earlier.
Different Algorithm Development: The crash highlighted specific vulnerabilities in first-generation automated trading systems. Without these lessons, algorithmic trading would have evolved along different paths, potentially creating even more complex and opaque market structures by the late 1990s.
Earlier High-Frequency Trading: The technologies and strategies that eventually led to high-frequency trading might have emerged earlier and with less regulatory scrutiny, potentially becoming dominant by the mid-1990s rather than the 2000s.

Alternative Market Structure Evolution

Fragmented Marketplaces: The regulatory responses to Black Monday included efforts to improve coordination between different market segments. Without these initiatives, the proliferation of alternative trading venues might have occurred earlier and with less coordination, creating a more fragmented market landscape.
Different Derivative Markets Development: Without the sobering influence of the crash, derivatives markets might have expanded more rapidly with less oversight. This could have led to earlier development of the complex structured products that later played roles in the 2008 crisis.
International Market Relationships: Black Monday was a globally synchronized crash that highlighted the interconnectedness of international markets. Without this demonstration, cross-border regulatory coordination might have developed more slowly, potentially leaving global markets more vulnerable to regional shocks.

Impact on the Tech Bubble and Bust (1995-2002)

The dot-com bubble and its subsequent collapse would likely have unfolded differently in a world without Black Monday:

Potentially More Extreme Bubble: Without the market memory of Black Monday, the irrational exuberance of the late 1990s might have reached even greater extremes. Institutional investors and regulators, lacking the recent experience of a major market collapse, might have been less cautious as technology stock valuations soared to unprecedented levels.
Different Fed Response: Alan Greenspan's approach to the tech bubble was influenced by his experience during Black Monday. Without that formative crisis early in his tenure, he might have been more aggressive in trying to restrain market enthusiasm through monetary policy, potentially leading to an earlier but less severe correction.
Alternative Regulatory Framework: The regulatory framework overseeing the explosive growth of internet companies might have evolved differently, perhaps with less emphasis on market stability mechanisms and more focus on traditional fraud concerns.

Repercussions for the 2008 Global Financial Crisis

Perhaps most significantly, the absence of Black Monday would have altered the conditions leading to the 2008 Global Financial Crisis:

Different Risk Management Practices: Black Monday demonstrated the importance of liquidity and systemic risk management. Without these lessons, financial institutions might have developed even more aggressive leverage policies and less robust risk management systems in the early 2000s.
Alternative Regulatory Philosophy: The post-Black Monday regulatory philosophy emphasized the importance of circuit breakers and trading halts during extreme volatility. Without this foundation, the regulatory approach to the housing bubble and structured finance might have been even more laissez-faire.
More Severe or Earlier Crisis: The combination of potentially more aggressive risk-taking, higher leverage, less robust circuit breakers, and different central bank crisis management experience suggests that a financial crisis might have occurred earlier than 2008, perhaps in response to the dot-com crash or the 9/11 attacks, or that the 2008 crisis might have been even more severe when it arrived.

Technological Development and FinTech Evolution

The relationship between technology and finance would have evolved differently without the cautionary tale of Black Monday:

Different Technology Adoption Patterns: In our timeline, Black Monday created healthy skepticism about automation without human oversight. In this alternate timeline, financial institutions might have embraced fully automated systems more rapidly, potentially accelerating fintech development by a decade or more.
Alternative Trading Platforms: Without the post-crash focus on market stability, alternative trading systems might have evolved with greater emphasis on speed and less on safety, potentially creating a different ecosystem of trading venues by the 2000s.
Earlier Cryptocurrency Emergence: The fundamental conditions that led to the development of cryptocurrencies—distrust of centralized financial institutions and interest in technological alternatives—might have materialized differently or earlier without the specific market structure reforms that followed Black Monday.

Global Economic Development Through 2025

By 2025 in this alternate timeline, several distinctive differences might be apparent:

Market Structure: Global markets would likely feature even more interconnection but potentially fewer coordinated circuit breakers and stability mechanisms, creating a system that enables faster global capital flows but with greater vulnerability to flash crashes and systemic shocks.
Different Financial Center Development: Without the specific lessons of Black Monday that highlighted the importance of regulatory coordination, financial center development might have followed a different pattern, with perhaps greater dispersion of specialized centers rather than the concentration in a few global hubs.
Alternative Crisis Cycle: The financial world would likely have experienced a different sequence of booms and busts, potentially including crises that never materialized in our timeline and avoiding some that did occur, but likely still demonstrating the fundamental boom-bust cycle inherent to financial capitalism.
Retail Investor Participation: Without the psychological impact of Black Monday, retail investor participation in equity markets might be even more widespread, potentially creating different patterns of wealth distribution and retirement security across developed economies.

By 2025, this alternate financial world would be recognizable to inhabitants of our timeline but would feature significantly different market structures, regulatory philosophies, technological systems, and institutional memories—all stemming from the absence of that single turbulent day in October 1987.

Expert Opinions

Dr. Jeremy Siegel, Professor of Finance at the Wharton School and author of "Stocks for the Long Run," offers this perspective: "Black Monday 1987 was a watershed moment that fundamentally altered how we think about market risk and stability. In a timeline where that crash never occurred, I believe we would have seen a more gradual evolution of market safeguards, likely triggered by a series of smaller disruptions rather than one catastrophic day. The absence of this shared trauma might have led to more fragmented national responses to market structure problems rather than the coordinated international approach that emerged post-1987. Paradoxically, while the immediate aftermath might have seemed more stable, the financial system might actually have developed greater fragilities without the hard lessons learned during and after Black Monday."

Elizabeth Warren, financial regulation expert and former head of the Congressional Oversight Panel for the Troubled Asset Relief Program, suggests: "The 1987 crash was an early warning about the dangers of financial innovation outpacing regulatory understanding. Had that warning never sounded, I believe regulators would have remained even further behind the curve as derivatives, securitization, and algorithmic trading transformed markets through the 1990s and 2000s. The crash forced regulators and market participants to acknowledge that modern markets could experience catastrophic failures that traditional theories couldn't explain. Without that cognitive shift, the regulatory approach to the housing bubble and the rise of shadow banking would likely have been even more hands-off, potentially making the 2008 crisis even more devastating for ordinary Americans when it inevitably arrived."

Richard Bookstaber, risk management expert and author of "A Demon of Our Own Design," provides this analysis: "Black Monday revealed how seemingly rational individual risk management decisions could collectively create system-wide vulnerabilities—what we now call the 'fallacy of composition.' In a world where that crash never happened, I suspect this crucial insight might have taken much longer to penetrate financial thinking. The specific mechanisms that failed in 1987—portfolio insurance and program trading—would have continued to proliferate until they eventually triggered a crisis, perhaps at an even larger scale. More broadly, without the 1987 experience early in his tenure, Greenspan's Fed might never have developed its distinct approach to crisis management that came to define an era. The financial world's development without Black Monday would be like imagining a medical researcher's career without their first encounter with a pandemic—the entire trajectory of their work would follow a different path."